Waste Connections CEO says M&A pipeline as strong as he's ever seen

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Q1 Earnings

Revenue

$1.14B

YoY Change

9.5%▲

Adjusted EBITDA

$356.9M

Waste Connections reported an "above average" quarter of acquisitions, with CEO Ron Mittelstaedt saying during the Q1 earnings call that "the pipeline is as strong as I've seen it in 18-plus years, probably going back to the late 1990s, in terms of opportunities." Year-to-date, the company has signed or completed deals worth an estimated $165 million in annualized revenue.

M&A:

In March, Waste Connections bought Right Away Disposal in Arizona. This company's footprint covered the region between Phoenix and Tuscon and came with three collection operations, one MRF, two transfer stations and one MSW landfill.

In April, the company bought the Heart of Florida landfill near Ocala. Mittelstatedt described it as "very large, very new," adding that it's one of the last remaining privately-owned MSW landfills in the state and will complement existing Progressive assets.

In May, an agreement was also signed for "a new market entry to acquire a provider of collection, processing and transfer services with approximately $55 million of annualized revenue" that is expected to close in June.

So far Waste Connections has been the most vocal about its M&A activity during Q1, compared to reports of smaller tuck-in deals from large competitors, in the latest of many signs that consolidation may accelerate in this post-tax cut environment.

All of this M&A news follows similar reports from Q4, where the company announced the purchase of Bay Disposal & Recycling. This year, tuck-ins have also been completed in Idaho, Nebraska, North Carolina and Texas. Looking ahead, Mittelstaedt said the company could see 4-5% acquisition growth for the year and remained open to deals of any size.

Pricing:

Waste Connections reported total pricing was 4.3%, exceeding projections and coming in higher than other competitors. Mittelstaedt provided some interesting details on the strategy behind this.

All of the company's geographic regions have pricing above 3.5%, due to what executives view as a good economic environment. Though Mittelstaedt also noted that there "a number" of markets and customers not seeing prices increases at all.

When price increases do happen, he wants to make them count. "Look, the reality is whether you raise price 2% or you raise it 10%, the same customer is going to cry, right. That has never changed in this business. So you might as well do it 5% to 8% and make it worth your while."

When asked how this pricing approach compared to other companies that are more data-driven, Mittelstaedt said he thought this scientific thinking only went so far. "I still think it's an art. The greater utilization of data just makes you a better painter ... I would say that the market model is outperforming the data model."

Looking Ahead:

Because recycling only accounts for 2% of the company's revenue, the topic didn't take up as much time during the call as it has for others. Though the $18 million year over year drop in recycling revenue, which was offset by other positive aspects of the business, is still a concern.

Mittelstaedt said he "could not agree more" with what the Republic Services team said on their call this week about reevaluating the recycling model. While he recognized this would take multiple years and "substantive renegotiation" for long-term municipal contracts, Mittelstaedt said "quite a bit of progress" could be made in the short-term.

Reducing injury rates and improving labor retention for employees in the former Progressive footprint remains a priority. Turnover in that group has dropped from about 44% to 27%, with 60% of that voluntary as compared to 90%, but the goal is to continue driving those rates down.

With all other aspects of the business looking strong, Waste Connections now anticipates its adjusted free cash flow for 2018 will be above the originally projected $850 million. The company has also started doing share repurchases again, with about $42 million worth bought back in the first quarter of 2018.